If you've never had a credit card before, it's important to understand how they work. When used responsibly, a credit card can be a useful financial tool that helps you manage purchases, build a credit history and cover unexpected expenses.
A credit card isn't extra money. It's a line of credit that you'll need to repay, so understanding how it works from the start can help you build healthy financial habits.
How does a credit card work
A credit card gives you access to a pre-approved amount of credit from a bank or lender. This is known as your credit limit.
When you make a purchase using your credit card, you're borrowing money that you'll need to repay. Many credit cards offer an interest-free period, which means you won't be charged interest if you repay your balance in full within the specified time frame.
If you carry a balance beyond the interest-free period, interest may be charged on the amount owing.
Before choosing a card, think about how much credit you actually need and how you plan to use it.
This includes considering both your credit limit and your spending habits. Think about how often you'll use the card, how much you may spend, and how quickly you'll be able to repay what you owe.
Understand interest
One of the most important things to understand before getting your first credit card is how interest works. Different credit cards can have different rates, fees and features, so it's worth taking the time to compare your options.
1. Purchase rate
The interest rate most commonly advertised on a credit card is known as the purchase rate. This is the rate that applies to your purchases if you don't pay off your statement balance in full by the due date.
2. Interest-free period
Many credit cards offer an interest-free period on purchases. This gives you a set amount of time to repay your statement balance before interest may be charged.
When comparing cards, it's worth looking at the length of the interest-free period and understanding any conditions that apply. Used wisely, an interest-free period can help you manage your spending and avoid paying unnecessary interest.
Understand fees and charges
Like any financial product, credit cards can come with fees and charges. Understanding when these may apply can help you avoid unnecessary costs and get the most out of your card.
1. Avoid unnecessary fees
One of the most common fees is a late payment fee, which may be charged if you miss a repayment. Setting up direct debits, payment reminders or making repayments early can help you stay on top of your account and avoid extra costs.
2. Be careful with cash advances
Using your credit card to withdraw cash is known as a cash advance. Cash advances often attract a fee and may also be charged interest at a different rate to everyday purchases.
Before using your credit card to access cash, make sure you understand any fees, charges and interest rates that may apply.
What lenders consider in the application process
When you apply for a credit card, the lender will assess your application to determine whether the card is suitable for your circumstances and whether you'll be able to manage the repayments.
While every lender has their own criteria, there are a few common things they'll typically consider
1. Job stability
Lenders will usually look at your employment status, income and work history to understand your ability to meet repayments.
2. Credit history
Your credit history may also be reviewed. This helps lenders understand how you've managed credit products and repayments in the past.
3. Personal and financial information
You’ll need to provide personal details and identification documents so your identity can be verified. You may also be asked to provide information about your current financial situation, including existing loans, credit cards, living expenses and other financial commitments.